III. Factors Affecting Exchange Rate
Contents
1. Factor Affecting exchange rate
2. Exchange rate and international
competitiveness
3. Nominal exchange rate (NER) and real
exchange rate (RER)
4. Nominal effective exchange rate (NEER) and
real effective exchange rate (REER)
5. Conclusion
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
2
1. Factors Affecting Exchange Rates
Note:
The equilibrium exchange rate will change over time as
supply and demand schedules change
The factors that cause currency supply and demand
schedule
S
20830VND/$
D
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
Q
3
1. Factors Affecting Exchange Rates
e = f(IT, IC, INF, INT, INC, EXP, GC)
International trade (import-export) (IT)
International capital movements (short and long term)
(IC)
Inflation rate differential (INF)
Interest rate differential (INT)
Income level differential (INC)
Expectations (EXP)
Government controls (GC)
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
4
1. Factors Affecting Exchange Rates
International Trade (Import-Export)
IMvnd ↑ → D$↑, Svnd↑ → VND↑/$ depreciation VND,
appreciation $
EXvnd ↑ → Dvnd ↑, S$↑ → VND↓/$ appreciation VND,
depreciation $
S
S
21500VND/$
S‘
20830VND/$
20830VND/$
D‘
20830VND/$
D
D
Q
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
5
1. Factors Affecting Exchange Rates
International capital movements
CapEXvnd ↑ → D$↑, Svnd ↑ → VND↑/$ depreciation VND,
appreciation $
CapIMvnd ↑ → Dvnd ↑, S$↑ → VND↓/$ appreciation VND,
depreciation $
S
S
21500VND/$
S‘
20830VND/$
20830VND/$
D‘
20830VND/$
D
D
Q
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
6
1. Factors Affecting Exchange Rates
Relative inflation rates
Pvnd ↑ → D$↑, Svnd ↑ → VND ↑/$ depreciation VND,
appreciation $
Pvnd ↓ → Dvnd ↑, S$↑ → VND ↓/$ appreciation VND,
depreciation $
Relative interest rates
ivnd↑ → CapIMvnd↑ → Dvnd ↑, S$↑ → VND↓/$ appreciation
VND
ivnd↓ → CapEXvnd↑ → D$↑, Svnd ↑ → VND↑/$ depreciation
VND
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
7
1. Factors Affecting Exchange Rates
Relative income levels
InCvnd ↑ → D$↑, Svnd ↑ → VND ↑/$ depreciation VND,
appreciation $
InCvnd ↓ → Dvnd ↑, S$↑ → VND ↓/$ appreciation VND,
depreciation $
Expections
ExPvnd ↑ → Dvnd ↑, S$↑ → VND ↓/$ appreciation VND,
depreciation $
ExPvnd ↓ → D$↑, Svnd ↑ → VND ↑/$ depreciation VND,
appreciation $
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
8
1. Factors Affecting Exchange Rates
•
•
•
Government controls
Impose foreign exchange barriers
Impose foreign trade barriers
Interventions in the foreign exchange market
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
9
2. Exchange rate and international
competitiveness
Exchange rate effects on international competitiveness
of and vice versa
Appreciation of home currency
• Domestic goods become more expensive in term of
foreign currency (foreign markets) exports decrease
• Foreign goods become cheaper in domestic market
import increase
Trade balance deteriorates
Depreciation of home currency
• Domestic goods become cheaper in term of foreign
currency (foreign markets) exports increase
• Foreign goods become more expensive in domestic
market import decrease
Trade balance improves
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
10
2. Exchange rate and international
competitiveness
Appreciation: Export Decreases
Time
Price in VND
Exchange rate
Price in $
1
20000
20000/$
1$
2
20000
19000/$
1,052$
Depreciation: Export Increases
Time
Price in VND
Exchange rate
Price in $
1
20000
20000/$
1$
2
20000
21000/$
0,952$
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
11
3. Nominal and Real Exchange Rates
Types of exchange rates
(1)
(2)
(3)
(4)
Nominal Exchange rate –NER
Real Exchange rate-RER
Nominal Effective Exchange rate-NEER
Real Effective Exchange rate REER
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
12
3. Nominal and Real Exchange Rates
(1)Nominal exchange rate-NER
Concept
Nominal exchange rate is merely the price of one currency in
term of another with no reference made to what this
mean in terms of purchasing power of goods and
services
E(USD/VND) = 20830
Not to mention purchasing power of goods and service
means:
How many goods does 1 USD can exchange for in the
U.S?
How many goods and services does 20830 VND can
exchange for in Vietnam?
Possibly in the U.S can be purchased more, less or
equal in Vietnam
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
13
3. Nominal and Real Exchange Rates
The NER is usually represented in index form
Base period (100)
Current period compared to the base period (appreciation or
depreciation)
Change of the commodity currency
c=
-
E1 − E 0
× 100 %
E0
C > 0, means E 1 > E0 the commodity currency appreciate
C < 0, means E 1 < E0 the commodity currency depreciate
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
14
3. Nominal and Real Exchange Rates
Change of the term currency
T=
-
1
E1
−
1
E0
1
E0
100% =
E0 − E1
100%
E1
T > 0, means E0 > E1 the term currency appreciate
T < 0, means E0 < E1 the term currency depreciate
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
15
3. Nominal and Real Exchange Rates
A depreciation or appreciation does not necessarily imply
that the country become more or less competitive on
international markets due to inflation differentials
between two countries. For such we have to look at the
real exchange rate
Assumed e change of rates (appreciation - e >0 or
depreciation – e<0):
• ∏-∏* = e = 0 international comptitiveness unchanged
• ∏-∏* > e international competitiveness becomes worse
• ∏-∏* < e international competitiveness improves
(e change of rate; ∏ home inflation rate; ∏* foreign inflation
rate)
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
16
3. Nominal and Real Exchange Rates
(2)Real Exchange Rate-RER
Concept
The real exchange rate is the nominal exchange rate
adjusted for relative prices (inflation differentials)
between the countries under consideration
Real exchange rate (static form)
P*
er = E
P
er
real exchange rate
E nominal exchange rate
P* foreign price level
P domestic price level
TS. Nguyễn Phúc Hiền - ðại học
Ngoại thương
17
3. Nominal and Real Exchange Rates
Real exchange rate represents the index form
The RER reflects a relative comparison of domestic against
foreign price levels in term of home price
Example a basket of goods and services in the U.S: 1000 USD
(P*=1000), in Vietnam 20.000.000VND (P=20.000.000)
• If E=20000, er = 1 E.P*=P purchasing power parity PPP
• If E=21000, er > 1 E.P*>P one unit VND purchase less
goods and services in foreign country than in Vietnam
VND real undervalued
• If E=19000, er < 1 E.P*
- Xem thêm -
.PDF 
29 
52 
64 
